Edited version of private ruling

Authorisation Number: 1011806679813

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Income tax exemption

What this ruling is about:

Is the Entity entitled to income tax exemption under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as a society, association or club established for the encouragement of game or sport pursuant to item 9.1(c) in the table in section 50-45 of the ITAA 1997?

Ruling:

The Entity meets all the requirements of item 9.1(c) in section 50-45 of the ITAA 1997 and is therefore entitled to income tax exemption under section 50-1 of the ITAA 1997.

The scheme that is subject to the ruling:

The Entity is incorporated as a company limited by guarantee.

The Entity's constitution contains an acceptable non-profit and dissolution clause.

The Entity's constitution included clauses supporting purposes of social activities between its sporting members and that of assisting and encouraging its chosen game of sport.

The Entity's constitution restricts membership to persons interested in its chosen game of sport.

The Entity has provided detailed information regarding how it provides for the encouragement of sport and of the social activities it undertakes.

The Entity has provided details of its facilities.

The Entity provided financial information from its annual reports.

Reasons for decision

Issue 1

Question 1

Is the Entity entitled to income tax exemption under section 50-1 of the ITAA 1997 as a society, association or club established for the encouragement of sport pursuant to item 9.1(c) in the table in section 50-45 of the ITAA 1997?

Detailed reasoning

Taxation Ruling TR 97/22 Income tax: exempt sporting clubs covers the circumstances under which an entity is regarded as being established for the encouragement of a game or sport. For an entity to fall within item 9.1(c) of section 50-45 of the ITAA 1997, it needs to satisfy the following three requirements:

1. It must be a society, association or club;

2. Meet the requirements of section 50-70 (special conditions); and

3. Its main purpose must be for the encouragement of a game or sport.

1. Society, Association or Club

The Entity was incorporated as a company limited by guarantee and has been conducting activities permissible under its objects.

This requirement is therefore satisfied.

2. Section 50-70 of the ITAA 1997

Item 9.1(c) in the table in section 50-45 of the ITAA 1997 states that there are special conditions under section 50-70 of the ITAA 1997 which must be satisfied. Section 50-70 of the ITAA 1997 states:

50-70 Special conditions for items 1.7, 2.1, 9.1 and 9.2

An entity covered by item 1.7, 2.1, 9.1 or 9.2 is not exempt from tax unless the entity is a society, association or club that is not carried on for the purpose of profit or gain of its individual members and that:

(a) has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia; or

(b) is a society, association or club that meets the description and requirements in item 1 of the table in section 30-15; or

(c) is a prescribed society, association or club which is located outside Australia and is exempt from income tax in the country in which it is resident.

The constitution of the Entity contains suitable non profit and winding up clauses.

It has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia. It satisfies item 50-70(a).

The requirements of section 50-70 are therefore satisfied.

3. Main Purpose of Encouraging a Sport or Game

To satisfy item 9.1(c) in section 50-45 of the ITAA 1997, the encouragement of a game or sport must be the main or dominant purpose of the club.

In Cronulla-Sutherland Leagues Club Ltd v Federal Commissioner Of Taxation (1990) 90 ATC 4215; 21 ATR 300 (Cronulla-Sutherland case), which was a case where the Leagues Club sought income tax exemption as a club established for the encouragement of a sport, Lockhart J examined in detail the judgment of the High Court in the Royal Australasian College of Surgeons v FCT (1943) 68 CLR 436 and a later High Court case, Stratton v Simpson (1970) 125 CLR 138 and said at ATC 4225; ATR 312:

In my opinion the question in a case such as the present must be what is the true character and nature of the appellant. It is a question of characterising the appellant having regard to its objects, purposes and activities.

For a society, association or club to qualify for the exemption granted by s 23(g)(iii) it must be one that has as its main object or purpose the encouragement or promotion of an athletic game or athletic sport in which human beings are the sole participants. It may have other objects or purposes which are merely incidental or ancillary thereto or which are secondary and even unrelated to the main object or purpose without disqualifying the body from the exemption. But if it has two co-ordinate objects, one of which is outside the exemption, the exemption cannot apply because it would be impossible to say that one object is the main or predominant object.


The material facts and circumstances which should be examined to characterise the main purpose of the relevant body include its constitution, its activities, its history and its control. These may alter from time to time and the purpose of establishment may correspondingly change. It is not sufficient to look to the formation of the body and to ascertain what was at that time the purpose of its formation. The statute gives a periodic operation to the words and directs the inquiry to a particular time, namely, the year of income so that consideration must be given not only to the purpose for which the society was established but also the purpose for which it is currently conducted.

The question is therefore whether in all the circumstances of this case the main purpose for which the appellant was established during the income tax years in question was the encouragement or promotion of rugby league football.

3.1 Encouragement of a game or sport

Paragraph 11 of TR 97/22 states:

11. 'Encouragement' means 'stimulation by assistance', according to the Macquarie Dictionary. It is essential that the encouragement of a game or sport is the main or dominant purpose of a club. Encouragement can occur directly by:

· forming, preparing and entering teams and competitors in competitions in the game or sport;

· co-ordinating activities;

· organising and conducting tournaments and the like;

· improving the abilities of participants;

· improving the standard of trainers and coaches;

· providing purchased or leased facilities for the activities of the game or sport for the use of club members and visitors; or

· encouraging increased and wider participation and improved performance;

and can occur indirectly:

· through marketing; or

· by initiating or facilitating research and development

The Notes on Clauses of the Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 2) 1990 state:

The terms "encouragement or promotion" used in subparagraph (iii) are not specially defined, but have their ordinary meaning. The words cover both directly carrying on activities and supporting them less directly, for example by providing financial support.

The Entity encourages participation of a game or sport through:

· sponsorship

· assisting in the expansion and upgrading of sporting facilities; and

· supporting a sport club through the provision of an annual fairest and best medal, weekly best player award and in 2010 assisting players in undertaking an educational trip interstate.

It is accepted the Entity meets the requirement of encouragement of a game or sport.

3.2 Main Purpose

To be eligible for exemption under item 9.1(c) of section 50-45 of the ITAA 1997, the Entity's main purpose must be to encourage a game or sport.

As stated above difficulties in determining main purpose can arise where a club conducts other activities, particularly social or commercial activities.

TR 97/22 states that a club's main purpose can only be ascertained after objectively weighing all the club's features and lists the following features in paragraphs 15 and 16 as indicating a club's main purpose.

15. Features that are highly persuasive in supporting a conclusion that the main purpose of the club is to encourage a game or sport include:

· the club conducts activities in the relevant year that are directly related to the game or sport (see paragraph 51);

· the sporting activities encouraged by the club are extensive (see paragraph 53);

· the club uses a significant proportion of its surplus funds in encouraging the game or sport (see paragraph 54); and

· the club's constituent documents emphasise that the club's main purpose is to encourage a game or sport and the club operates in accordance with those documents (see paragraph 56).

16. Other features that are relevant but less persuasive include:

· a high level of participation by members in the game or sport (see paragraph 57);

· the members of the committee, or persons who control the direction, of the club are predominantly participants in or concerned with the encouragement of the game or sport (as distinct from day to day management of the club) (see paragraph 58);

· voting rights in the club vest only in members involved in encouraging the game or sport, whether by personal participation or by encouraging participation by others (see paragraph 59); and

· the club promotes itself to patrons and the public as one encouraging the game or sport, and its advertisements and publicity emphasise the game or sporting facilities provided (see paragraph 60).

As recommended by TR 97/22 the highly persuasive features listed above in paragraph 15 were considered in relation to the Entity.

Each of the relevant but less persuasive features listed in TR 97/22 were also examined in the context of the Entity.

Analysis

TR 97/22 states that a club's main purpose can only be ascertained after objectively weighing all of the club's features stating in paragraph 47 that:

47. The determination of a club's main purpose in the relevant year of income is a matter of fact and degree. In Cronulla Sutherland, Lockhart J in the Full Federal Court said, at ATC 4225; ATR 312:

'The material facts and circumstances which should be examined to characterise the main purpose of the relevant body include its constitution, its activities, its history and its control. These may alter from time to time and the purpose of establishment may correspondingly change. It is not sufficient to look to the formation of the body and to ascertain what was at that time the purpose of its formation. The statute gives a periodic operation to the words and directs the inquiry to a particular time, namely, the year of income so that consideration must be given not only to the purpose for which the society was established but also the purpose for which it is currently conducted.'

And further in paragraphs 41, 43 and 44 that:

41. To be eligible for the exemption, the club's main purpose must be to encourage a game or sport. Difficulties can arise where the club conducts other activities, particularly social or commercial activities.

43. However, if the main purpose becomes the carrying out of those other activities, the club is not exempt. Nor is it exempt if it continues to be involved in the game or sport to a substantial degree but is equally involved with another purpose or purposes. As Lockhart J said at ATC 4225; ATR 312:

'But if it has two co-ordinate objects, one of which is outside the exemption, the exemption cannot apply because it would be impossible to say that one object is the main or predominant object.'

44. Therefore, the fact that a sporting club also encourages social and other activities does not, of itself, preclude the club from being exempt. The club is still exempt provided the encouragement of a game or sport is the club's main purpose. By contrast, where the club's main purpose is providing social amenities and licensed club facilities to its members, the exemption does not apply.

Accordingly to determine the Entity's main purpose it is necessary to weigh all the features described in paragraph 15 and 16 of TR 97/22 and considered above. In so doing paragraph 14 of TR 97/22 notes that the presence or absence of a feature may not conclusively determine that the club's main purpose is or is not the encouragement of a game or sport.

In consideration of the highly persuasive features it is determined the Entity's constitution provides for the provision of social activities and facilities equally with the purpose of supporting an associated sporting team.

The various activities the Entity undertakes to support the sports team demonstrate a strong commitment to encouraging and supporting a game of sport. The social activities the Entity undertakes are minor in comparison. Further the social activities and facilities the Entity undertakes are predominantly related in some way to the game of sport, for example the social half time together with other sporting club members at games and the Grand Final function.

TR 97/22 states in paragraph 51 that the encouragement of club members to be spectators to support the game or sport is an example of activities directly related to sport. Accordingly even these activities which were classed by the applicant as social could be considered as encouraging the game of sport.

The Entity's statement of income and expenditure show that their expenditure is predominantly undertaken in the support of the game of sport. This is undertaken either directly through their expenditure/sponsorship in relation to the sporting team and associated projects, or indirectly through their fundraising expenditure.

In considering the less persuasive features listed in TR 97/22 the membership and control of the Entity is restricted to persons involved in, or interested in the game of sport. All members have participated directly in the game of sport as players, officials and staff or indirectly as spectators.

The Entity promotes its purposes on it's webpage as being for fraternisation between members within each club and with those from opposing clubs and to raise funds for the betterment of their chosen sport, especially in the area of junior development.

In consideration of these features it is concluded that while the Entity has dual sporting and social purposes, their sporting purpose is greater than their social purpose. On this basis it is determined that the main purpose of the Entity is the encouragement of a game or sport.

Conclusion:

The Entity meets all the requirements of item 9.1(c) in section 50-45 of the ITAA 1997 and is therefore entitled to income tax exemption under section 50-1 of the ITAA 1997.

Disclaimer

You cannot rely on the rulings in the Register of private binding rulings in your tax affairs. You can only rely on a private ruling that we have given to you (or to someone acting on your behalf).

The Register of private binding rulings is a public record of private rulings issued by the Tax Office. The Register is an historical record of rulings, and we do not update it to reflect changes in the law or our policies.

The rulings in the Register have been edited and may not contain all the factual details relevant to each decision. Do not use the Register to predict Tax Office policy or decisions.